2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM

CHECKLIST

2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) Client name and number _______________________________________________________________________________________ Prepared by

Date Reviewed by

DONE

100) GENERAL INFORMATION

Date

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COMMENTS OR EXPLANATION

1 01) Consider federal and state e-filing requirements. Requirements for use Forms 8453-F and 8879-F are specific to varying circumstances. Form 8453-F cannot be used as a transmittal form. Attachments must be made with a PDF attached to the electronic file. 1 02) Consider if any conflict of interest(s) exist(s) between the trust and the Trustor, trustee, or beneficiary. 1 03) Consider obtaining the following: 1) A signed engagement letter. 2) A separate engagement letter for tax advice under the CPA-client privileges provisions of § 7525.

104) Consider filing power of attorney.

105) If this is the first return of an estate, note the following: 1) Consider fiscal year filing. 2) Determine proper allocation of income and deductions between fiduciary return, estate, or final 1040. 3) Consider accrual basis election.

106) Consider filing Form 56 (Fiduciary Relationship Notice) even though not required for initial and final return (Recommended). 107) Review and update the name, address, year end, the type of entity, and the date entity was created. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) DONE


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108) Review the permanent file, prior year returns, memos, workpapers, correspondence files, and audit results. 1) Verify that copies of the trust agreement, will (including amendments and revisions), litigation correspondence, Form(s) 709, 706, or 8939 and the date created (for generation skipping transfer tax [GST] purposes) are in the permanent file. 2) Verify that decedent’s final income tax return is included in the file. 3) Consider capital loss and net operating loss (NOL) carryovers.

109) Consider reviewing the trust document or will for the following: 1) Income distribution requirements 2) Definitions of income 3) Beneficiaries 4) Corpus distribution requirements 5) Fiduciary and successor fiduciaries names 6) Termination date 110) Document the various provisions of the trust document and applicable state laws that determine the tax treatment of income, corpus, and distributions. 111) Determine if the relevant state has adopted a revised principal and income act, or amended other related laws since previous year. 112) Obtain copies of any court filings, inventories, accounting or tax information, claims, and reconcile discrepancies. 113) Inquire about any correspondence between fiduciary and beneficiaries relating to distributions, including appropriate notification of remainder beneficiaries. 1) Inquire that information regarding beneficiaries’ names, taxpayer identification numbers, addresses, states of residency, dates of birth etc. is correct. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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2) Consider obtaining copies of marriage certificates and birth certificates of beneficiaries. 3) Consider obtaining copies of death certificates of decedent (estates) and beneficiaries. 4) Confirm proof as U.S. citizens for grantor(s) or beneficiaries. 5) If beneficiary is not a U.S. citizen or resident, determine that current W-8BEN Forms (W-8 series) are in file. 6) Determine if there have been changes in income interests of beneficiaries during the year and document. 7) Determine if there have been changes in rights over corpus during the year and document.

114) If the election pursuant to § 645 to treat a revocable trust as part of an estate been made (Form 8855),consider the following: 1) Review Reg. § 1.645-1 for the statement of election requirements. 2) Complete the Form 8855 for the first Form 1041 of the estate/trust and attach it in numerical order considering other forms attached (before Form 8960 in most cases). 3) Review § 645 and final Reg. § 1.645-1 for definition of qualified trust, applicable date, and time prescribed for filing election. 4) Determine if the box on page 1 of Form 1041 has been checked (Important) and attach information required for trust (trustee, EIN). 5) Consult instructions for procedure if an executor is appointed after Form 8855 is filed or if the election is to be effective as of a date later than the date of death. 6) If election period had terminated and entity has not terminated consider requirements for ongoing returns such as possible switch to a calendar year and new EIN.

115) Obtain documentation relating to the approval and the acceptance of successor fiduciary. 116) Determine the proper classification of trust (grantor, simple, complex, qualified disability trust, Electing Small Business Trust [ESBT], pooled income fund, and bankruptcy estate). 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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117) If grantor trust, consider optional filing methods (note a final Form 1041 for the tax year immediately preceding first year of alternative reporting should be filed) (Reg. § 1.671-4(g)). 1) Determine state tax requirements when making the election. 118) If grantor trust, consider optional filing methods (note a final Form 1041 for the tax year immediately preceding first year of alternative reporting should be filed) (Reg. § 1.671-4(g)). 1) Obtain copies of the agent’s reports. 2) Determine that the agent’s adjustments have been entered in the records and appropriate carryover workpapers. 3) Prepare amended K-1s if necessary to reflect the agent’s adjustments. 4) Amended returns should be filed if the agent’s adjustments affect income tax returns of years other than those audited, or the corresponding federal or state returns for the same year. 5) Obtain copies and consider impact of correspondence with the IRS or state taxing authority.

119) Review proforma or organizer for accuracy.

120) Review and update schedules for federal and state carryover items (regular and alternative minimum tax [AMT]) such as: 1) Net operating loss 2) Capital loss 3) General business credit (watch for expiration) 4) Minimum tax credit 5) Other credits 6) Installment sales. Consider applicable tax rates for components of gain 7) Adjustments required by changes in accounting methods (§ 481) 8) Passive activity losses or credits 9) Suspended losses or credits due to basis and/or at-risk limitations

2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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10) Partnership, LLC or S corporation basis 11) “Publicly traded partnership” losses 12) Investment interest expense 13) Nontaxable dividends, or reinvested dividends or original issue discount (OID) 14) Prior year overpayment(s) credited to current year 15) Distributions within 65 days after year-end 16) Deadline for replacing involuntarily converted property (§ 1033)

121) Determine that the box has been checked when estate (or §645 electing trust) has been open more than two years.

122) Inquire if any below-market loans were made or received. 1) Determine existence of properly executed notes and imputed interest consequences of those notes.

123) Review for adequate stated interest on debt instruments: 1) Determine whether OID or the unstated interest rules require restatement of note interest and principal. 2) Consider election for purchased discount under § 1278.

124) Review for proper reporting of interest recognition in accordance with Reg. § 1.483-4 for debt instrument providing contingent payments. 125) Determine that accounting methods used are comparable to the preceding year unless changes are approved or required (note Form 3115 may need to be filed). Consider (effective 2013) repair regulations. 126) If accrual method of accounting, note economic performance exception for recurring items. 127) Determine accounting income as provided under the governing document and applicable state laws.


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128) A scertain if this trust is taxed as a corporation. If so, complete the 1120 checklist.

129) Determine if the grantor (or spouse) has a reversionary interest equal to or greater than 5 percent (including grantor type trust status).

130) Review powers of trustee (including grantor type trust status).

131) Review documents to determine if trust is income tax defective to grantor (note grantor taxed on income and trust should not pay the tax). 132) Review powers of spouse or others which may cause grantor trust classification Consider that partial grantor trust rules under Sec. 678 may apply necessitating a grantor letter in addition to Schedule K-1. 133) Determine situs of estate or trust for state filing requirements. Consider that more than one state may consider the entity a resident. 134) Determine residencies of fiduciaries and beneficiaries and related state income tax return filing requirements.

135) Determine if multistate filing is required.

136) Review respective state income tax statues for differences in reporting from federal. 137) Determine holding period and adjusted basis of assets acquired via donor gift. 138) Review capital assets for changes (reorganizations, stock dividends, reinvested dividends, OID, etc). 139) Review proper filing requirements if the trust appears to be an “abusive trust arrangement” (also known as “Unincorporated Business Trusts”). 140) Determine the proper filing of a bankruptcy estate for an individual under Chapter 7 or 11 of the U.S. Code, if gross income exceeds exemption.


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141) If the entity has household employees, consider the following: 1) Ascertain state reporting number and filing requirements. 2) Complete Form 1040 Schedule H.

142) Review GST inclusion ratio: 1) Determine that adequate support is in the file to verify inclusion ratio. 2) Obtain copies of “Notice of Allocation” statement from gift tax return(s).

143) Determine if any beneficiaries are skip persons.

144) Is the trust a foreign trust? 1) Determine if trustee will modify the trust to conform to post 1996 standards. If so, consider attaching disclosure statement to returns for two-year period. 2) If the trust was in existence as of Aug. 20, 1996, and was treated as a U.S. person, consider election to continue U.S. person treatment if appropriate (Reg. § 301.7701-7(f)). 3) Determine if a U.S. person created a foreign trust (note different tax computation method). 4) Determine if Form 3520 or 3520A is required to be filed in conjunction with creation of a foreign trust or transfer of property to or receipt of property from a foreign trust (§ 6048(a)) (Note exceptions for Canadian Registered Retirement Savings Plan (RRSP) under U.S.-Canada Treaty). 5) Inquire if a U.S. beneficiary of a foreign trust transferred property to a foreign grantor of the trust. 6) Consider treatment of obligations issued or guaranteed by the trust in connection with property transfers made after Feb. 6, 1995, or any grantor or beneficiary of the trust or related party (§ 679(a)(3)(C)). 7) Consider gain recognition for transfers of property to a foreign trust (§ 684(a)). 8) Determine if the trust was a domestic trust that became a foreign trust. Consider gain recognition (§ 684(c)).


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2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) 100) GENERAL INFORMATION

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DONE

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9) Determine if the foreign trust has a U.S. grantor (note the reporting requirements of § 6048) (note Forms 3520/3520A may need to be filed). 10) Determine if the foreign trust made distributions, either directly, or indirectly, to a U.S. person (§ 6048). 11) Note that Rev. Rul. 2013-14 provides that Mexican Land Trusts are not treated as trusts for U.S. tax purposes. This also relieves certain MLTs from the need to protectively file Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

145) Determine if there has been an inadvertent change in any person who has the power to cause the domestic or foreign trust to change its tax residence (note twelve month replacement period) (Reg. § 301.7701-7(d)(2)(i)). 146) Consider if disaster relief provisions apply.

147) Note that a checkbox (F) is provided when Form 1041 is used for an Amended Return. There is a special box to check for a net operating loss carryback.


201) Compare sources and amounts of dividend and interest income with prior year items. 202) If first year return for estate, compare income sources of estate with items reported on the decedent’s final Form 1040. Instructions suggest that “Form 1041” and the trust/estate name and address be listed on Form 1040 to indicate amounts reported on the fiduciary return. 203) If there is a brokerage account, consider the following: 1) Compare brokerage and bank statements for assets at year-end, to verify inclusion of all items of income related to the assets. 2) Review 1099s for dividends, interest, and gross proceeds from sales.


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DONE

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204) Is there or should there be interest income? 1) Is all interest reported that was received using the fiduciary’s accounting method? Include interest even if it was reported as accrued on Form 706. 2) Was interest purchased on debt obligations and collected this year? Accrued interest should be deducted from Form 1099-INT income. 3) Consider election to amortize bond premium on taxable bonds. Such amortization reduces interest income and requires reduction in the basis of the bonds. 4) Inquire about interest not on 1099-INT — family loans, etc. 5) Review assets to determine if any exist that may produce non-cash income, for example, OID, market discount, etc. 6) Disclose exempt income on state and municipal bonds on page 2. Determine the amount from resident state sources. Interest reported should be net of accrued interest purchased and amortization. 7) If a 1099-OID is received, include as interest income. 8) Isolate interest on U. S. obligations for exclusion on state returns. Consider Federal Home Loan Banks and other similar agencies not reported as U.S. obligations on Form 1099-INT. 9) Inquire about interest on installment sales and tax refunds. 205) Review dividends to segregate qualified, taxable, nontaxable, and capital gain dividends. 206) Inquire if the trust or estate had investment income from foreign sources.

207) Inquire if foreign, federal or state tax was withheld.

208) If any property was sold, exchanged, or involuntarily converted during the year, consider the following: 1) Determine holding period and basis for federal, state, and AMT tax purposes. 2) Determine that gains and losses are properly characterized.


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DONE

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3) Determine that the holding period is long-term and that basis used for property passing from a decedent is based on fair market value at date of death or other applicable estate tax value (note Form 8939 may have been filed for deaths in 2010). 4) Compare correct basis to Form 1099-B covered transactions for proper reporting on Form 8949. 5) Determine if installment sale rules apply. 6) Review application of the wash sale rules and report on Form 8949. 7) Report gains on constructive sales of appreciated financial positions. 8) Review application of straddle rules and available elections under § 1092. 9) When shares of a mutual fund are initially sold consider allowable methods of calculating basis (note that same method must be used for all future sales). 10) Consider the effect on basis of nontaxable stock dividends, reinvested dividends and OID. 11) Determine if non-recognition of gain rules apply to “defective” trusts treated as grantor trusts.

209) Consider limitations of losses for transactions with related parties.

210) In a year subsequent to an installment sale, determine that the proper income is reported after giving recognition to recapture amount.

211) Determine that gains on installment sales made by decedent are properly reported by fiduciary (regarding receipts after date of death).

212) Inquire if there are worthless securities (note that substantial worthlessness of short sale property is a gain recognition event).

213) Consider ordinary income treatment for gain on sale of market discount bonds.


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DONE

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214) Did the entity sell, exchange or convert business or §1231 assets during the year? 1) Reconcile to depreciation schedule. 2) For § 1231 gains, determine the amount subject to ordinary income treatment as a result of five-year recapture rule for prior net § 1231 losses.

3) Consider provisions related to: a) Rules for like-kind and related party exchanges (Form 8824). b) Recapture of depreciation, including § 291 recapture or tax credit, or reduction of credit carry forwards (note § 1245 applications). c) Suspended losses. d) Deferring gain from involuntary conversions. 215) Determine if state tax refund shown on prior year return was received or credited. 216) Review reporting of state income tax refunds based on the tax benefit rule.

217) Compare sources of K-1s received with prior year returns.

218) Review current K-1s received to determine that all items have been properly reported. (§ 179 deductions on K-1s received are not deductible until recaptured or the entity is sold).

219) Consider limitations of § 465 at-risk, § 704(d), or § 1366(d) basis rules.

220) If a partnership interest is held, consider the following: 1) Determine if a § 754 election was made at partnership level and deduct additional depreciation. 2) If a basis adjustment exists, account for differences between “inside” and “outside” basis. 3) If the final year of a partnership determine that distributions listed on the K-1 were received and account for any differences. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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DONE

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221) If a distribution or technical termination has occurred with regard to a partnership, consider both the allocation of basis rule under § 732(c), Reg. § 1.732 1(c), and the § 732(d) election. 222) Were there any passive activities (see Passive Activity Checklist) (note that activities may be grouped in accordance with Prop. Reg. § 1.469-4) if an appropriate economic unit)? 1) If an estate, consider the $25,000 special allowance exception for rental real estate. 2) Determine if pass-through entity in which an interest is held has separately reported activities. 3) Prepare Form 8582 for regular tax purposes and AMT purposes. 4) Consider the Frank Aragona case (142 T.C. No. 9) for guidance regarding material participation by trustees for §469 and §1411.

223) Obtain copy of QSST election made by beneficiary if taxpayer is a Qualified Subchapter S Trust (QSST).

224) If trust is an ESBT (§ 1361(c)(2)(A)(v)), consider special taxation rules under § 641(c).

225) If the taxpayer is a QSST shareholder that made loans to the corporation to utilize losses, determine gain on repayment.

226) If the taxpayer has a S corporation, partnership, or LLC loss carry forward not previously utilized due to insufficient basis, calculate additional basis generated in the current year needed to deduct all or a portion of the suspended losses.

227) If appreciated property was used to fund a pecuniary bequest, consider the following: 1) That gain is recognized. 2) That the new basis is properly calculated. 3) That information is provided to recipient.


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228) Determine if there is income from discharge of indebtedness. 1) Consider exclusion and elections under § 108 (Reg. § 1.1017 1). 2) Consider filing Form 982.

229) Consider the proper treatment of qualified or nonqualified retirement or deferred compensation plan distributions received.

230) Consider making § 685 election for qualified funeral trust (by filing Form 1041-QFT).

231) If the fiduciary operates a business or a farm complete Schedule C or F (Form 1040) for schedule of cost of operations and verify that beginning and ending inventory agree with the books.

232) For all businesses of the taxpayer: 1) Review the taxpayer’s vacation pay policy to determine if a deduction is allowable on the accrual basis (vested at year-end and paid within two and one-half months after year-end). 2) Determine if uniform capitalization rules apply and follow regulations. 3) Determine if long-term contract rules apply and follow regulations.

233) For § 274(d) expense claimed for entertainment, gifts and travel (Rev. Procs. 2008-59, 2009-47, and Rev. Rul. 2008-23): 1) Inquire if expenditures can be substantiated by adequate records. 2) Limit meals and entertainment to allowable percentage. 3) Consider exceptions and optional per diem method.

234) Inquire about other possible sources of income such as salaries, rents, royalties, tax refunds, taxable fringe benefits, etc.


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2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) 300) DEDUCTIONS

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301) If the entity paid interest on funds borrowed or on debt acquired from the decedent, for the allocation of interest expense: 1) Determine that the proper allocations have been made relating to the following items: investments, trade or business, passive, tax-exempt income, etc. 2) For interest on debts allocated to multiple expenditures, determine that the proper ordering of loan repayments has been considered. 3) Determine that the interest has been properly reallocated to the expenditure when either the subject of the first expenditure has been disposed of or the proceeds used for expenditure; or the character of the expenditure has changed.

302) Investment interest expense: 1) Limit the deduction for investment interest expense to net investment income. 2) Prepare carryover schedule if necessary. 3) In computing net investment income, deduct investment expenses after the application of the two percent adjusted gross income (AGI) limitation. 4) Consider the election to treat net long-term capital gains and qualified dividends as investment income subject to ordinary income tax rates.

303) Determine if there is personal interest that is non-deductible (paid on underpayments of tax for example).

304) Determine if interest was paid on a residence which is occupied by a beneficiary. If so, see rules for Qualified Residence Interest and Qualified mortgage insurance premiums.

305) Determine if interest was paid under §6601 on any unpaid portion of estate tax attributable to the value of a reversionary or remainder interest.


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DONE

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306) If interest was paid pursuant to §§ 6166 or 6161, consider: 1) No income tax deduction is allowed for interest paid for decedents dying after 1997. 2) If estate tax liability is deferred under § 6166, determine deductibility of interest paid. 3) Consider filing a Supplemental Form 706 to claim interest as an administration expense. 307) If the fiduciary paid taxes, consider: 1) State and local income taxes are deductible unless election is made to deduct state and local sales taxes. An estate or trust cannot use the Optional Sales Tax Tables for Individuals. 2) State, local and foreign real property and personal property taxes are deductible. 3) Foreign or U.S. possession income taxes can be deducted or a credit can be claimed. 4) Generation-skipping transfer (GST) tax imposed on income deductions is deductible.

308) If this is the first year the taxpayer has incurred real property taxes, determine if a § 461(c) election to accrue ratably is more beneficial than adopting the recurring item exception.

309) Were fees paid to the fiduciary (trustee/executor) during the year? 1) The §67(e) regulations were finalized May 9, 2014 requiring that fees be unbundled for tax years beginning after Dec. 31, 2014. 2) Determine if the fees must be allocated to tax-exempt income.

310) If trustee fees or personal representative fees are paid, inquire if deducted fees are properly documented and not deducted on Form 706.


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DONE

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311) If the trust is a charitable remainder trust, consider: 1) Determine if there is unrelated business income (see 990-T Checklist). 2) For distributions to non-charitable beneficiaries, consider the following:

a) Historical ordering rules (Reg. § 1.664-1(d)). b) Ordering rules (Prop. Reg. § 1.664-1(d)(1) Nov. 19, 2003). 3) Determine if Form 1041-A is required to be filed. 4) Complete Form 5227. 5) Note reporting of pre-2013 investment income on Form 5227 and Schedule K-1. 312) Does the will or trust agreement provide for charitable deductions? 1) Determine if charitable contributions are accounted for in accordance with trust instrument or will. 2) Inquire if contributions are to qualified charitable organizations. 3) A scertain that charitable contributions have been properly allocated to tax-exempt income. 4) Complete Form 1041-A, if required. 5) Determine that charitable contributions are made from gross income, accumulated gross income or capital gains allocated to corpus, paid or permanently set aside for charitable purposes. 6) Inquire if adequate contemporaneous documentation was obtained for cash and non-cash contributions. 7) Charitable contributions made but not specified in the will or trust agreement may be deductible by beneficiaries. Enter on Schedule K-1. 8) Consider the Sec. 642(c) election to deduct charitable contributions made in the subsequent tax year should be made.

313) Determine if the estate (or a trust during a §645 election period) should claim a deduction for funds “set-aside” for charity. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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314) Note that charitable contributions listed on Schedule K-1 from a pass-through entity owned by the estate or trust are deductible by a simple trust.

315) Were legal, accounting or tax preparation fees paid during the year? 1) Determine if the fees must be allocated to tax-exempt income. 2) Inquire if deducted fees are properly documented and not deducted on Form 706. 316) Determine allocation of indirect expenses to taxable and tax-exempt income (note that these expenses may be deductible at the state level if related income is taxable for state purposes-a separate allocation calculation is necessary).

317) Prepare a schedule of other deductions and determine which expenses are not subject to the 2% AGI limitations.

318) Determine which deductions are subject to the 2 percent AGI limitation per the 67(e) regulations and verify the calculation of the 2% amount.

319) If the election to amortize bond premium on taxable bonds was made, amortization on bonds acquired before Oct. 23, 1986, is deducted on line 15a.

320) Inquire about other allowable deductions such as for domestic production activities, casualty losses, and certain vacation home expenses.

321) If administrative expenses and losses during administration are claimed on Form 1041 rather than Form 706, determine that election is attached to Form 1041.

322) Determine that deductions for taxes, interest, business expenses, investment expenses and depletion accrued at the date of death are claimed on both Forms 706 and 1041 (deductions in respect of decedent).


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DONE

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323) Compute distributable net income (DNI) and: 1) Determine that direct and indirect expenses have been properly allocated to the various classes of income (including tax-exempt and passive activities). 2) Ascertain if capital gains are required to be allocated to DNI. 3) Determine if short-term capital gains distributed from mutual funds are treated as ordinary income or capital gain based on trust agreement or state law.

324) Were distributions made during the tax year? 1) Separate Required (Tier I) from Other (Tier II) distributions. 2) Verify that Accounting Income is calculated in accordance with the trust agreement or applicable state law. 3) Determine amount of the distribution deduction. 4) Determine that specific bequests are not included in distribution deduction. 5) If a property distribution, determine that the deduction is equal to the lesser of the property’s adjusted basis or fair market value. 6) Consider the § 643(e)(3) election to recognize gain or loss upon a property distribution, other than the funding of a pecuniary bequest.

325) Consider advising fiduciary to make distributions during the first 65 days of each year to facilitate prior year distribution deduction elections for estates or complex trusts. 326) Consider distribution deduction election if there are qualifying distributions from a complex trust or estate within 65 days after year-end. 327) Determine if the trust or estate is entitled to an estate tax deduction for income in respect of a decedent. 328) Determine allocation of expenses and credits between the beneficiaries and estate or trust (§ 691(c)). 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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DONE

N/A


DONE

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329) Consider whether Power to Adjust, Unitrust provisions or Sec. 643 regulations present opportunities to allocate capital gains to DNI and whether such provisions can be added.

400) BENEFICIARY DATA — SCHEDULE K-1

401) Verify the correctness of the beneficiary name, address, and identification number. 402) Compute Distributable Net Income (DIN) as follows: 1) Determine the character of distributable income; the beneficiary’s income is considered to have the same proportion of each class of income (or verify that software has done so). 2) Deductions cannot be allocated to create a negative class of income and negative income is not part of DNI. 3) Allocate deductions directly attributable to a specific class of income to that income. 4) Allocate deduction not directly attributable to a specific class of income in a reasonable way including an allocation to tax exempt income. 5) Allocate excess directly attributable deductions to other classes of income but do not allocate passive deductions to portfolio or nonpassive or expenses for tax-exempt income to taxable income. 6) Do not allocate expenses to an item of income not included in the computation of DNI or attributable to corpus. 403) Distribute each item on Schedule K among the Schedules K-1 in accordance with the provisions of the will or trust agreement or in accordance with state law if the governing agreement is silent. 404) Ensure that no negative amounts are shown on Schedule K-1 lines 1-8. 405) Consider that gain from the sale of a passive activity that is part of DNI is reported on an attachment to Schedule K-1 and not as capital gain or other income. 406) Ensure that the fiduciary return and Schedules K-1 report passive income on an activity-by-activity basis. Attach details on a separate sheet. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) 400) BENEFICIARY DATA — SCHEDULE K-1

DONE

N/A


407) Determine if the agreement or state law requires depreciation, depletion or amortization to be allocated to the beneficiar(ies) or whether an election can be made to allocate or to retain those deductions. 408) Was estate tax paid on income in respect of a decedent reported as part of DNI? 1) Calculate the beneficiary’s share of the estate tax to report on line 10 Schedule K-1. 2) The calculation of the estate tax attributable to IRD is attached to Form 1041 even if fully allocated to beneficiar(ies). 409) If this is the final return for the trust or estate, consider: 1) If deductions exceed income, calculate “excess deductions” on an attachment to Form 1041. 2) Report excess deductions in Box 11 using Code A. Note that beneficiaries must itemize tax deductions to benefit. 3) Report the beneficiar(ies) share of short term (Code B) or long term (Code C) capital gains in Box 11. 4) Report the beneficiar(ies) share of net operating loss (Code D) and AMT net operating loss (Code E) in Box 11. 5) Provide basis information on assets distributing including an adjustment for unused passive loss carryovers if applicable. 6) Provide the amount of net investment income distributed to the beneficiary. This is reported as an adjustment (Code H) in Box 14. 7) Provide additional information to beneficiaries as follows: a) Segregate all tax preference, AMT adjustment items, and exclusion items, and list on the appropriate lines of Schedules K and K-1. b) Domestic production activities information affects Schedule K-1 if Qualified Production activities income and W-2 wages are part of DNI. c) Tax-exempt income (federal and/or state), net of allocated expenses. Isolating the amount of tax-exempt income from the beneficiary’s state of residence may be appropriate. d) Other items not deductible by the fiduciary such as charitable contributions of decedent’s personal property or personal items such as property taxes paid on behalf of the beneficiary. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) 400) BENEFICIARY DATA — SCHEDULE K-1

DONE

N/A


DONE

N/A


410) Tax-credit information as follows: 1) Credit for estimated taxes (only if Form 1041-T was filed timely). 2) Credit for backup withholding (W-2 or Form 1099R withholding is not allocated on Schedule K-1). 3) Other allowable credits and credit recapture information. 4) Foreign tax credits are commonly allocated between the fiduciary and the beneficiary. 411) The penalty for failure to provide Schedule K-1 to a beneficiary when due or failure to include all required information on the form is $100 per schedule K-1.

500) DEPRECIATION/AMORTIZATION

501) Does the taxpayer have any tangible or intangible property placed in service in prior years? 1) Review the depreciable basis of each asset. 2) Review the property class, recovery period and depreciation method for each asset. 3) Review the applicable convention (half-year, mid-quarter, or mid-month). 4) If a short year, determine that Rev. Proc. 89-15 is followed. 5) Determine recapture if the business usage has declined to 50% or less. 6) Consider change in accounting method under Rev. Proc. 2011-14, as modified by Rev. Proc. 2012-20, to correct MACRS lives, methods, etc. 7) Consider the provisions of Rev. Proc. 2002-54 to rectify prior year claims of less than allowable depreciation or amortization. 8) If there has been a purchase price adjustment, see Prop. Reg. § 1.168-2 (d)(3).


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2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) 500) DEPRECIATION/AMORTIZATION

DONE

N/A


502) Did the taxpayer place any tangible property in service during the current year? 1) Determine the depreciable basis of each asset. 2) Determine the applicable convention (half-year, mid-quarter, or mid-month). 3) Determine the property class, recovery period and depreciation method for each asset. 4) Determine that the cost of leasehold improvements is being recovered over the applicable recovery period, regardless of the lease period. 5) Determine depreciation of property received in a like-kind exchange or involuntary conversion (T.D. 9314, Feb. 26, 2007). 6) If a short year, determine that Rev. Proc. 89-15 is followed. 7) Consider electing the Alternative Depreciation System (straight-line over an ADS recovery period) for qualifying General Depreciation System property. 8) Consider electing the 150% DB method over the recovery periods applicable to the regular tax for tangible personal property otherwise qualifying for the 200% DB method. 9) Consider cost segregation analysis for building components. Note shorter lives for non-structural components. 10) For farming, determine that MACRS is applied using 150% DB. Note ADS required if elected out of § 263A. 11) Determine if expenditures were incurred that are eligible for the Disabled Access Credit (Form 8826). If the taxpayer does not qualify for the credit or has expenditures in excess of the credit limit, consider making § 190 election to expense the costs.

503) Does the taxpayer have any intangible assets such as goodwill, software costs, etc.? 1) Determine that amortizable items, including goodwill, are written off over the correct periods. 2) Determine that start-up expenditures are properly expensed or capitalized. 3) Determine if recapture rules for § 197 intangibles apply.


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DONE

N/A


504) Did the taxpayer place any software in service during the current year? 1) Determine the depreciable basis of each asset. 2) Determine the applicable convention (half-year, mid-quarter, or mid-month). 3) If a short year, determine that Rev. Proc. 89-15 is followed. 4) Consider 36-month amortization rules for software.

505) Consider anti-churning rules. 506) If property is leased to a tax-exempt entity or used predominantly outside the United States, consider the possible need to use the ADS. 507) Consider change in accounting method for like-kind exchange property under Reg. § 1.168(k)-1(g)(4)(ii). 508) Consider enhanced depreciation rules for qualified disaster property placed in service in qualified disaster areas. 509) Consider special amortization rules for qualified geological and geophysical expenditures. 510) Reconcile depreciation expense to supporting schedules.

511) Consider state depreciation, if different.

512) Consider AMT and ACE depreciation, if applicable. 513) Is Form 4562 required? 1) Complete all questions regarding personal use of listed property. Also applies to standard mileage rate autos. 2) If costs were incurred during the current year, determine that all amortizable items are separately stated and the proper code section cited. 514) If any depreciable assets were sold, exchanged, demolished or abandoned make adjustments for depreciation. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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CHECKLIST


DONE

N/A


DONE

N/A


515) Determine if depreciation or amortization must be allocated to beneficiaries on Schedule K-1. 516) Remember that §179 does not apply to fiduciaries acquiring depreciable assets (or if allocated by another pass through entity on Schedule K-1).

600) TAX COMPUTATION AND CREDITS

601) Compute regular tax. 602) Consider qualified dividends and capital gains tax computations noting various rates depending on type of asset and holding period. Tax rates may vary with a 0%, 15% or 20% being used. 603) Calculate net investment income tax (Form 8960). 1) Modified adjusted gross income is calculated using §67(e). 2) Determine investment income (taxable interest, dividends, annuities from nonqualified plans, rents, royalties, capital gains, etc). 3) Determine whether Schedule K-1 income from pass through entities is investment income. 4) Consider whether Schedule C, E or F income is investment income. Frank Aragona Trust v. Comm. 142 T.C. No. 9. 5) Be aware of other possible sources of investment income (gains from commodity or financial instruments trading or refunds of state income taxes claimed as investment deductions in a prior year). 6) Deductible expenses include investment interest, investment expenses deducted on page 1 and an allocable portion of state income taxes and other page 1 deductions. If all income is from investments, all deductions may be appropriate. 7) Check election to regroup passive activities. 604) Consider alternative tax rate attributable to S corporation items (ESBT). 605) Consider AMT and AMT items allocated on Schedule K-1. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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CHECKLIST

2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) 600) TAX COMPUTATION AND CREDITS

DONE

N/A


606) AMT must be computed by making adjustments such as: 1) Depreciation on property placed in service after 1986. 2) Determine that the same recovery period is used for regular tax and AMT for property placed in service after 1998. 3) Mining, exploration research & experimental costs must be capitalized and amortized over a ten-year period. 4) Income from long-term contracts generally must be computed using the percentage of completion method of accounting (note exception for “home construction contracts”). 5) Income from post-Feb. 28, 1986, dispositions of real or personal property held for sale in the ordinary course of business shall be determined without regard to the installment method, except in cases where an election is made to pay interest on the tax deferred by the qualified installment sale (note exception for cash basis farmers). 6) Use AMT NOL deduction in place of the regular NOL deduction. Post-1986 AMT NOL is available only to the extent of 90 percent of pre-NOL alternative minimum tax income (AMTI). 7) Recompute gains or losses on sales and exchanges using the AMT adjusted basis. 8) Adjust page 1 deductions for the following AMT rules: a) No deduction is allowed for miscellaneous itemized deductions subject to 2 percent adjusted gross income (AGI) limitation or most taxes. b) State tax refunds are excluded from AMTI. c) Qualified housing interest may be restricted. 9) The following preference items must be added to AMTI: a) E xcess intangible drilling costs. Consider election to amortize over 60 months for regular tax purposes and the § 57(a)(2)(E) exception. b) Tax-exempt interest on private activity bonds issued after Aug. 7, 1986 (note bonds issued during 2009 and 2010 are excluded). c) Accelerated depreciation on real and leased personal property placed in service after 1987 but depreciated using pre-1987 rules due to transitional provisions of the Tax Reform Act of 1986.


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CHECKLIST


DONE

N/A


10) Consider special rules denying certain losses for AMT purposes: a) Net passive activity losses as adjusted for tax preferences (Form 8582). b) Certain farm losses. c) Capital loss in excess of $3,000 when AMT basis is greater than regular tax basis. 11) Consider foreign tax credits. 12) Consider recalculating distribution deduction for Schedule I for a simple trust. 13) Compute Distributable Net AMTI. 607) Consider tax credits (being aware of expiration dates) such as: 1) Enhanced oil recovery credit (Form 8830) 2) Foreign tax credit (Form 1116) 3) Investment tax credit (rehabilitation, transition and carryovers) (Form 3468) 4) Credit for federal tax on gasoline, special fuels and lubricating oil (Form 4136) 5) Low-income housing credit (Form 8586) 6) Work Opportunity Credit for eligible employees (Form 5884) 7) The credit for qualified clinical testing expenses (Orphan Drug Credit), and associated carrybacks and carryovers (Form 8820) 8) Credit for employer Social Security and Medicare taxes paid on certain employee tips (Form 8846) 9) Welfare-to-work credit for eligible employees (Form 8861) 10) General business credit (Form 3800) 11) Disabled Access Credit (Form 8826) 12) Alcohol fuel and biodiesel mixtures credit 13) Wind and other renewable resources credit


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CHECKLIST


DONE

N/A


DONE

N/A


608) Calculate state tax. If filing multistate returns, determine if a credit may be claimed on resident state return for taxes paid to other nonresident states. 609) Determine if the trust or estate is subject to: 1) Investment credit or other general business credit recapture. 2) Foreign estate or trust treatment (tax calculated as for a non-resident alien individual not present in the U.S) (§ 641(b)). 610) Confirm the amounts and dates of any federal, state and local estimated tax deposits/payments (including withholding) for the year, prior year over-payments applied, and extension payments. 611) Determine if EFTPS is required for federal and/or electronic payments for state purposes. 612) For all trusts and for estates that has been open for more than two years, complete Form 2210, if withholding and estimated tax payments are less than 90 percent of the tax liability and if balance due exceeds $1,000.

700) OTHER REQUIREMENTS

701) Determine if requirements for avoiding penalties for improper disclosure or use of taxpayer information by tax return preparers imposed under §§ 6713 and 7216 have been met. 702) Consider estimated tax for the forthcoming year and prepare estimated tax payment vouchers (note prior year 100 percent or 110 percent rules) (estates are exempt from estimated payment requirement for first two years) (Note estimated tax rules for small businesses). 703) Compare taxable income and tax to projections and court filings for reasonableness. 704) If a partnership interest was sold during the year determine the following: 1) That the appropriate information was given to the partnership to enable it to prepare Form 8308. 2) The required statement under Reg. § 1.751-1(a)(3) is attached if the partnership had § 751(a) assets. 2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST — LONG (FORM 1041)

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CHECKLIST

2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) 700) OTHER REQUIREMENTS

DONE

N/A


705) Consider penalties and procedures relating to abusive tax shelters, if applicable. 706) Consider capitalizing carrying charges (interest, taxes, etc.) on non-productive property. 707) Consider the election to forego a net operating loss carryback (note statement required to be attached to return for election). 708) If an NOL deduction is claimed, prepare supporting schedules for regular and AMT carryovers to be attached to the return. 709) Consider that throwback rules apply for foreign trusts and trusts created before March 1, 1984 (unless not aggregated with other trusts under § 643(f)). 710) Attach tax shelter disclosure statement under Reg. § 1.6011-4 if estate or trust participates, directly or indirectly, in listed transactions. Form 8886 must be filed and taxpayer must also send a copy of the Form 8886 to the Office of Tax Shelter Analysis (OTSA). See Treasury Regulation § 1.6011-4(e)(1) and Form 8886 instructions. 711) If Form 8886 is required for tax shelters, attach it to Schedule(s) K-1 under Reg. § 1.6011-4. 712) Consider inconsistent treatment notice for income not consistently reported (Form 8082). 713) If § 6662 accuracy-related penalty could result from any income, deduction, loss or credit item which causes a substantial change in the beneficiary’s return and causes the preparer to rise to the level of preparer of the beneficiary’s return (note penalty increased from 20 percent to 40 percent for non-disclosed non-economic substance transactions) (HCA 2010, note Woodsum 136 T.C. no. 29). Consider the following: 1) If substantial authority exists for the item in question. If not, consider disclosure (Form 8275 or 8275-R). 2) Advising the taxpayer, in writing, of the penalty.

714) Attach extension requests for extended returns when required.


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CHECKLIST


DONE

N/A


715) Prepare filing instructions and transmittal letter to the trustee or executor taking into consideration the e-filing requirements. 1) If Forms 8275 or 8275-R are included in the tax return, consider making specific notation of same as part of the instructions or transmittal letter. 2) Attach Form 8948 with an explanation if return is not to be filed electronically. 716) If the taxpayer is a party to an “applicable asset acquisition” (transfer of assets that constitute a trade or business), use Form 8594, to determine that reporting requirements regarding allocation of purchase price have been met.

717) If there is more than one trustee or executor, attach statement required pursuant to § 6012(b)(5) (“Sufficient knowledge”).

718) Determine if related party transactions are properly reported on all available returns.

719) Determine if FinCEN Form 114 is needed to report foreign financial accounts. Must be filed electronically by June 30.

720) For information returns: 1) Inquire if taxpayer has complied with electronic filing requirements for required 1099s and W-2s. 2) Inquire if the taxpayer has filed all required information returns (1098 and 1099 series) and if the value of personal use portion of employer property, expense reimbursements under “unaccountable plans” and § 401(k) deferred compensation information has been included in employees’ W-2s. 3) Determine if Forms 1042 and 1042-S (Withholding Tax Information of Foreign Persons) have been filed.

721) Determine if there has been a taxable distribution for generation — skipping tax purposes that requires preparation of Forms 706-GS(D 1), 706-GS(T) and 706-GS(D).


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CHECKLIST


DONE

N/A


722) Consider filing Form 3520 if the estate or trust received gifts or bequests from the following foreign sources during the tax year: 1) Gifts greater than $100,000 from a nonresident alien individual or a foreign estate. 2) Gifts greater than $15,102 from foreign corporations or foreign partnerships.

723) Consider informing taxpayer of requirement to file Form 8300 for certain cash payments received of more than $10,000. 724) If the entity is a beneficiary of another estate or trust, consider the inconsistent treatment notice if the distributing estate or trust files no tax return (§ 6034A) (Form 8082). 725) Consider preparing reconciliation for the beneficiary, if applicable, of the difference between taxable income reported to the beneficiary and the income actually distributed. 726) Consider modified requirements for avoiding preparer penalties for returns. Note the following: 1) Undisclosed positions must generally meet the “substantial authority” standard. 2) Disclosed positions must generally meet the “reasonable basis” standard. 3) Tax shelters and reportable transactions to which §6662A applies must meet the “more likely than not be sustained on the merits” standard.

727) Consider disclosure requirements for written tax advice (See Circular 230).

728) Note tax planning or additional service suggestions.

729) Consider the requirement to notify taxpayer of third-party service provider.

730) Consider keeping a bank account open to deposit tax refunds from the final income tax returns.


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CHECKLIST

2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM 1041) (LONG) COMMENTS OR EXPLANATIONS

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2014 ESTATE AND TRUST INCOME TAX RETURN CHECKLIST (FORM

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